Archive for the 'prediction markets' Tag

I am set to enroll in a course entitled “Readings in Grand Strategy” next semester. The course description features many of the “greats” of strategy: Bismarck, Clausewitz, Philip II, etc. I began to wonder: as America struggles to find the way forward, are we searching for a great man or many good men?

I am fascinated by the knowledge problem in strategy. It’s the same problem which faces societies as they struggle to create an economic order. In “The Use of Knowledge in Society,” Friedrich Hayek wrote brilliantly on this issue,

“The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

Knowledge within an organization (or society) is decentralized. If America wants to make the “best” grand strategy, it has to somehow utilize all the dispersed bits of knowledge. Yet, we have an overwhelming amount of knowledge, which only serves to swamp decision-makers. For example, 50,000 intelligence products are created every year, to which Thomas Fingar, former DNI deputy director for analysis, concedes, “There can’t possibly be a market for.”

How do we aggregate the sum knowledge at our disposal? I would submit one brilliant mind cannot do this as well as many good minds. George Kennan’s “Long Telegraph” on the Soviet Union is an excellent example– one brilliant mind dominated policy discussion. Instead of asking one super-expert about the USSR’s intentions, we could have bet on it.

What if we were to have a large pool of experts and ask them to wager on a series of questions? One example, “In 5 years or less, will Russia have another armed conflict with Georgia?” The experts would then use virtual money to gamble on the outcome. It’s called a prediction market and they’re eerily accurate at forecasting. By tapping into the power of many minds, we can detect bits of information which would have previously gone unnoticed.

In many instances, the prediction market uses prices to represent probablilties. For example, if a Russian invasion of Georgia in the next five years were selling at $.20, then the market is forecasting a 20% likelihood of the invasion occuring.

Private companies already use them. Google found they gave “decisive, informative predictions” on “product launch dates, new office openings, and many other things of strategic importance to Google.”

It Works!

Google explains: “The orange line represents the average price, which is how often outcomes in that group should actually happen according to market prices. The purple line is how often they did happen. Ideally these would be equal, and as you can see they’re pretty close. So our prices really do represent probabilities – very exciting!”

While these markets can never supplant the CinC, perhaps they could be used as another piece of evidence to support our long-term decision-making. Either way, how can the Navy better tap into the knowledge of its 330,000 personnel? How can the DoD dig into its wealth of institutional knoweldge?